Yuan Sinks Beyond Five-Year Low as MSCI Rejection Saps Sentiment

The yuan extended losses from a five-year low, dragged down by MSCI Inc.’s decision to leave Chinese stocks out of its benchmark indexes.

The onshore currency fell 0.09 percent to 6.6023 a dollar as of 9:34 a.m. in Shanghai, China Foreign Exchange Trading System prices show. That is the lowest level since January 2011 and extends its losses over the past month to 1.1 percent. The yuan traded in Hong Kong dropped to a four-month low as the People’s Bank of China weakened its reference rate beyond 6.6 for the first time since early 2011.

MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, cited the need for additional improvements in the accessibility of China’s share market and said that it would reconsider inclusion in 2017. The move adds to downward pressure on the yuan, coming amid a surge in the dollar, rising odds of a Federal Reserve interest-rate increase and Britain’s possible exit from the European Union.

"There will be some disappointment from the decision to delay inclusion,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays Plc in Singapore. “Given negative factors in the market at the moment, such as rising risk aversion, I think you’ve got enough factors here to put further pressure on the yuan.”

Rising Risks

Volatility in China’s financial markets is growing amid speculation authorities won’t add to stimulus even as the economic outlook deteriorates. While the yuan’s losses have so far failed to ignite the volatility that swept global markets in August and January, Goldman Sachs Group Inc. strategists said June 2 that they shifted to an “outright negative view" on the currency. There’s a renewed risk of capital flight and speculation of another yuan devaluation, they said.

China’s foreign-exchange reserves slipped to the lowest level since late 2011 last month as a rallying dollar ate into the value of the holdings. While reserves have been generally steady this year, halting the steep decline of 2015, May’s tally extended the decline to 20 percent from the near $4 trillion peak in June 2014. Manufacturing gauges released this month showed activity remained subdued in May, after April economic data trailed estimates.

The dollar advanced Tuesday as investors dumped riskier currencies before central bank meetings in the U.S. and Japan and the U.K. Brexit referendum on June 23. The Federal Reserve is due to release its policy review statement later in the global day.

"The natural bias is of course for the onshore and offshore yuan to weaken from here, along with other dollar supportive forces like Brexit event risks and also global risk aversion," said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd.

To contact Bloomberg News staff for this story: Robin Ganguly in Hong Kong at rganguly1@bloomberg.net, Tian Chen in Beijing at tchen259@bloomberg.net, Justina Lee in Hong Kong at jlee1489@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Allen Wan